Insights

Landord and Tenant Act 1987: developers should be aware of when tenants' right to first refusal can affect their disposals

22 November 2016

Landord and Tenant Act 1987: developers should be aware of when tenants' right to first refusal can affect their disposals

The Landlord and Tenant Act 1987 gives residential tenants a right of first refusal where their landlord wants to make a disposal affecting all or part of their building.

The Act has been described by the Court of Appeal as "ill-drafted, complicated and confused". However, a breach of the requirements of the act could lead to a developer of residential property being fined £5,000 for committing a criminal offence.

It is of particular concern to developers of flats and mixed use premises intending to transfer their freehold or long leasehold interest in a building. The Act applies even before development is complete, because the definition of a flat includes premises 'intended' to be occupied as a separate dwelling.

The effect of the Act

The Act bites where a developer intends to make a "relevant disposal" of a building which contains two or more flats, and more than half of the flats in the building are held by tenants qualifying under the Act. Those tenants must be given a "right of first refusal" - ie the opportunity to purchase the interest for the same price and on the same terms as any proposed purchaser.

The provisions also bind mixed use commercial and residential premises where the commercial premises comprise no more than half the total floor area of the building.

"Relevant disposal" includes: •contracts completed by conveyance; •conveyances not conceded by contract; •sales at auction; •the grant of an option or rights of pre-emption; and •disposals for non-monetary consideration

Developers should be aware that conditional agreements for sale and surrenders are also caught by the Act.

Impact on timings

If a developer intends to make a relevant disposal under the Act, notice must be served on qualifying tenants at least 4 months before the disposal is to take place. There is no way of short circuiting the notice period, even if the tenants confirm they have no interest in acquiring the landlord's interest. If the tenants accept the offer there is a further 2 month period to allow the tenants to nominate a purchaser, so the Act can really slow down or even frustrate the transaction.

Multi Block Developments

Where a developer wishes to sell its interest in a multi-block development, the Act provides that the transaction should be "severed" so that each building is dealt with separately.

"Building" is not defined in the Act and the Courts have found that, if access ways, amenity areas, gardens or car parks are shared, a landlord may be able to serve a single notice on tenants for more than one building. However, this does not sit easily with the Act and it may be prudent to serve one Notice for each building as well as one for the whole development in case either is found to be invalid. It can often be difficult to determine how a development should be divided, which will be a question of fact in each case.

Can it be avoided?

The Act only applies to the disposal of the tenants' immediate landlord's interest so some developers adopt the process of putting in place a headlease of the residential parts which allows the freehold and the commercial elements of the building to be dealt with free of the Act. This "blocker" lease must be put in place before the Act applies to the building (i.e. before there are any qualifying tenants) otherwise it will itself comprise a relevant disposal.

Undoing the Transaction

If a relevant disposal takes place in breach of the Act, which can include serving an invalid notice, and the tenants find out afterwards, they can serve Notice on the landlord requiring the interest to be transferred to them for the same price. The only time limit on the exercise of this right is that the Notice must be served within 6 months of the tenants finding out that the transaction has taken place: in one case this was 10 years later.

Ignorance of the law is not defence!

So careful consideration needs to be given to whether a relevant disposal will take place under the Act and legal advice should always be taken to avoid the serious consequences of the Act. The failure to do so could lead to the transaction being undone, as well as a fine of up to £5,000. Ignorance of the law is no defence.

This article was written by Rachel Morrish, Associate, for more information please contact Rachel on +44 (0)20 7427 6644 or rachel.morrish@crsblaw.com

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